North Korean Economy Watch

Korea Times
Chang Se-moon
1/23/2007

Obviously, it is important to know the correct answer to this question. Sanctions that have no impact on North Korea’s economy will not change the behavior of North Korean leaders. If sanctions do have a significant impact, the possibility that North Korean leaders may be tempted to resolve the pending security issues through negotiations exists.
In answering the question, however, we need to keep in mind what the British economist John Maynard Keynes (1883-1946) said: “The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor draw correct conclusions.’’ In plain English, Keynes stressed an unbiased economic way of thinking that could help us draw correct conclusions. In other words, until we review all the facts with an open mind we should not make up our minds.

This is exactly what we will do by assessing the impacts of economic sanctions on North Korea.

The first question that comes to mind is which sanctions are we talking about. If we review U.S. sanctions on North Korea since the outbreak of the Korean War in 1950, there would be too many sanctions imposed on North Korea to be practical. There are three important sanctions that are still in effect, however. One is the U.S. denial of a Most Favored Nation (MFN) trade status on North Korea’s exports.

This sanction was imposed on North Korea’s exports to the United States on September 1, 1951, following the outbreak of the Korean War. MFN tariffs are the lowest tariffs that are levied on imports to the U.S. Over 99 percent of imports to the United States qualify for the MFN tariffs. Without MFN status, tariffs on North Korean exports to the United States are so high that North Korea simply cannot even imagine exporting anything to the United States.

The second of the three important sanctions stemmed from the bombing of Korean Air 858 by North Korean agents on November 29, 1987. The explosion killed 115 innocent passengers and crew members. On January 20, 1988, North Korea was placed on the list of countries that supported international terrorism according to the U.S. Export Administration Act of 1979.

The importance of this sanction is that placement on the list has made it impossible for North Korea to borrow money from international financial institutions including the World Bank and the International Monetary Fund. Like the denial of MFN status, the placement of North Korea on the list of countries supporting international terrorism continues to this date.

The third of these three key sanctions relates to tightening of North Korea’s illegal financial transactions, which culminated in Banco Delta Asia’s termination of business dealings with North Korea as of February 16, 2006. You may know that Banco Delta Asia had long been suspected of handling North Korea’s illicit activities overseas such as laundering of counterfeit U.S. dollars and sales of illegal drugs

Banco Delta Asia is located in Macao, which is a Special Administrative District of China. Tightening of North Korean financial transactions was extended to North Korean trade during 2006. This added pressure on North Korea originated from U.N. Resolution 1540 following North Korea’s test-launching of long-range missiles on July 5, 2006, as well as from U.N. Resolution 1718 which followed North Korea’s nuclear test on October 9, 2006.

Are these sanctions having an impact on North Korea’s economy? Perhaps, a more accurate question is whether these sanctions are placing enough pressure on North Korean leaders to reconsider the possibility of returning to the negotiation table?

One aspect is the status of North Korea’s trade deficit. As you probably know, North Korea buys from other countries much more than it sells to other countries. When the amount of imports exceeds the amount of exports it’s called a trade deficit. North Korea’s annual trade deficit averaged about $800 million from 2003 to 2005. This figure does not include North Korea’s trade deficit against South Korea, since South Korea appears to consider any financial support to the North as a long-term investment rather than a trade deficit.

How has North Korea been paying for the trade deficit? The ways have been unique. Almost the entire deficit appears to have been financed by weapons sales, illicit activities, and funds flowing from South Korea through joint projects.

In fact, a study by the Korean Institute for Defense Analysis indicates that full implementation of U.N. Resolution 1718 would cause North Korea to lose just about the same amount ($700 million to $1 billion) by stopping exports of weapons and illegal drugs and counterfeit money.

The Economist Intelligence Unit is quoted to have estimated in 2003 that “North Korea earned as much as $100 million a year from counterfeit money, while in 2005, a U.S. task force estimated that “$45 million to $60 million in Pyongyang’s counterfeit currency (primarily in U.S. $100 bills) is in circulation,’’ reportedly, including some in Seoul’s Namdaemun Market.

Assuming that recently added sanctions will cause North Korea to lose about $800 million that it has been earning overseas each year, the next interesting question is how North Korea will pay for the annual trade deficit of $800 million in the future? If North Korea does not pay for its imports, other countries will refuse to sell products to North Korea and the North Korean economy will suffer.

North Korea cannot borrow from world financial institutions because of the 1988 U.S. sanctions that branded North Korea as one of countries supporting international terrorism. They cannot use the money from foreign direct investment because China and Korea are the only two countries that have been willing to invest in North Korea, but the combined amount is not even close to paying for the annual trade deficit.

Think of it this way. If you borrow money every year, and lenders believe that your ability to pay off the debt is rapidly declining, will lenders continue to lend you money? Not likely. With sanctions adversely affecting North Korea’s ability to pay for imports, North Korea will find it increasingly difficult to buy what it needs. The breaking point may not be imminent, but the future is predictable.

This is what I think will happen. North Korea will ask China to increase its foreign direct investment in North Korea by giving China more incentives for such investment. These incentives may include low taxes and free land. North Korea will ask South Korea to send more money.

For instance, as of July 1, 2004, Hyundai Asan and North Korea set the entrance fee to Mt. Kumkang at $10 for a day trip, $25 for a two-day trip and $50 for a three-day trip. On May 1, 2005, these fees were raised to $15, $35, and $70. On July 1, 2006, these fees were raised again to $30, $48, and $80. This is just one way.

North Korea may also ask South Korea to lend it a large sum of money with an empty promise of paying it back. This explains in part why it is so important for North Korea to have leaders of the South Korean government who are friendly to North Korea.

These desperate acts are likely to be very short of paying for the majority of the annual trade deficit. If sanctions continue to be effective, the likelihood of North Korea returning to the negotiation table increases. Economics is rarely boring, especially when it deals with real problems.

Christian Science monitor
Donald Kirk
1/22/2007

More than a century after American mining engineers first opened up North Korea’s gold mines, a fortune in gold and other metals and minerals offers the prospect for North Korea to ease the pressures of financial sanctions.

The question, however, is whether North Korea can navigate around a US Treasury order that forbids institutions doing business in the United States from dealing with Banco Delta Asia in Macao, the main avenue for North Korean financial dealings.

The Treasury ban, first promulgated in 2002, has effectively frozen the North’s efforts to conduct international business. While it doesn’t extend to gold, market experts say that US officials have made it clear that banks should not buy North Korean gold.

“The US has been using coercion, innuendo, and sheer force to intimidate banks from dealing with North Korea,” says Colin McAskill, chairman of Koryo Asia Ltd., which invests in North Korea through the Chosun Development & Investment Fund. “We want to get a breakthrough on the six-party talks by getting the sanctions eased or lifted entirely. We’re at a very delicate stage.”

North Korea, says Mr. McAskill, “wants to move back into legitimate business.” Selling gold on the London market – the world’s largest – “is one way they can prove that,” he adds. “They have a wealth of minerals – gold, silver, zinc, magnesite, copper, uranium, platinum – that needs investment to extract.”

One indication of North Korea’s need to sell gold was its decision to provide information needed by the London Bullion Market Association (LBMA) to list the North’s central bank as a “good deliverer” of gold and silver. Listing with the LBMA is essential for refiners who want to sell their products in London. The bank’s listing was suspended 2-1/2 years ago when it failed to respond to LBMA requests for “proactive monitoring.”

The LBMA said it does not “take into account any political criteria,” and will keep the bank on its rolls for another three years without monitoring.

Despite the listing, market experts say the big banks that are major buyers of gold – and form the LBMA’s core membership – are not likely to flout the spirit of the US Treasury order against Banco Delta Asia, through which North Korea exported gold prior to the ban.

“The fact that they’re on the list does not mean they can deliver to the London market,” says Stewart Murray, the LBMA’s chief executive. “When we have sanctions, none of the facilities will accept delivery from a company or a country that is subject to these sanctions,”

Trying to build momentum for talks

The reluctance of buyers in London to deal in North Korean gold, widely seen as the likeliest legal way to mitigate the impact of the banking ban, adds urgency to another effort at six-party talks on North Korea’s nuclear weapons.

The chief US negotiator, Christopher Hill, has been traveling through northeast Asia, stopping off here, in Tokyo, and in Beijing after talks in Berlin last week with his North Korean counterpart, Kim Kye-Gwan. The Chinese are expected to set a date for renewing the talks, which broke off before Christmas amid North Korean demands for the US to lift the ban on Banco Delta Asia.

North Korea raised hopes for renewed six-party talks, saying “a certain agreement” was reached in Berlin last week. Neither Mr. Kim nor Mr. Hill have provided details, but analysts suspect that the two discussed the financial issue and its relationship to the ultimate purpose of six-party talks: getting North Korea to give up its nuclear weapons.

North Korea has been renewing its drive to sell gold for the past year since submitting to the LBMA’s monitoring requirements. At the same time, the North has sold relatively small amounts of gold in Thailand, with which it has developed a strong trading relationship in recent years. Last spring, North Korea exported 1.3 tons of gold to Thailand for nearly $30 million while also looking for markets elsewhere in the region.

“Why would you go to the trouble of going to London,” asks Roger Barrett, whose firm, Korea Business Consultants in Beijing, is helping to develop gold mining in North Korea. “They’re totally entitled to sell their gold.”

No reports of exports since July

Yet there have been no reports that North Korea has exported any gold since testing seven long-range missiles in July. Since the North conducted an underground nuclear test in October, which resulted in deeper sanctions from the UN Security Council, dealers have reportedly been even more reluctant to buy North Korean gold.

Estimates of North Korea’s gold reserves range as high as 2,000 tons, but mining has been sporadic since British, American, and then Japanese interests mined for gold beginning in the 19th century. With foreign expertise, North Korean mining may return to the period between 1983 to 1993, when its central bank sold an average of one ton a month on the London market.

“What we’re doing is normal business,” says Mr. Barrett in Beijing, explaining the efforts at reviving the mining industry. “We’re creating jobs for people, in line with the UN basic charter, in line with economic growth.”

Daily NK
Yang Jung A
1/22/2007

Oh Kwang Chul, President of the North Korea Trade Bank and North Korea’s chief delegate in the Banco Delta Asia financial sanction talks will visit Beijing on the 23rd, Asahi Newspaper reported on the 22nd.

The newspaper, informed by a source in North Korea-China, reported that President Oh is scheduled to travel from Beijing to Pyongyang on a direct route on the 23rd to speak with the Chinese.

Indifferent to the fact that the next financial talks were to reconvene in New York says the U.S., North Korea is requesting that the talks be resumed in Beijing similar to the former meeting. It appears that President Oh’s trip to China will be to explain North Korea’s position to the Chinese and gain understanding and cooperation from the Chinese, claimed the newspaper.

The source revealed that developments made in Berlin, where the chief delegates of the six party talks met to discuss the North Korea financial issues and related issues is linked to Oh Kwang Chul visiting China.

The source also predicted that the North will shortly announce the reconvening of the six party talks.

Contrastingly, China’s Foreign Minister Wu Dei and U.S. Assistant-Secretary Hill met in Beijing on the 21st inciting to the press, the possibility of the next financial talks being held after the 29th.

Heritage 2007 Index of Economic Freedom

North Korea’s economy is 3% free, according to our 2007 assessment, which makes it the world’s least free economy, or 157th out of 157 countries. North Korea is ranked 30th out of 30 countries in the Asia–Pacific region, and its overall score is the lowest in the world.

North Korea does not score well in a single area of economic freedom, although it does score 10 percent in investment freedom and property rights. The opening of the Kaesong industrial venture in cooperation with South Korea has been a start in foreign investment.

Business freedom, investment freedom, trade freedom, financial freedom, freedom from corruption, and labor freedom are nonexistent. All aspects of business operations are totally controlled and dominated by the government. Normal foreign trade is almost zero. No courts are independent of political interference, and private property (particularly land) is strictly regulated by the state. Corruption is virtually immeasurable and, in the case of North Korea, hard to distinguish from necessity. Much of North Korea’s economy cannot be measured, and world bodies like the International Monetary Fund and World Bank are not permitted to gather information. Our policy is to give countries low marks for specific freedoms when it is country policy to restrict measurement of those freedoms.

Background:
The Democratic People’s Republic of Korea has maintained its Communist system since its founding in 1948. A serious economic decline began in the early 1990s with the end of economic support from the Soviet Union and other Communist-bloc countries, including China. Floods and droughts all but destroyed the agricultural infrastructure and led to severe famine and dislocation of the population during the 1990s. South Korean and Chinese investments in the economy have alleviated dire conditions. The government continues to rely on counterfeiting foreign currency and sales of missiles for money. That and the nuclear ambitions and isolationism of Kim Jong Il reinforce North Korea’s status as the hermit kingdom.

Business Freedom – 0.0%
The state regulates the economy heavily through central planning. The economic reforms implemented in 2002 allegedly brought some changes at the enterprise and industrial level, but government regulations make the creation of any entrepreneurial activities virtually impossible. The overall freedom to start, operate, and close a business is extremely restricted by the national regulatory environment.

Trade Freedom – 0.0%
The government controls all imports and exports, and formal trade is minimal. Data on North Korean trade are limited and compiled from trading partners’ statistics. Most North Korean trade is de facto aid, mainly from North Korea’s two main trading partners, China and South Korea. Non-tariff barriers are significant. Inter-Korean trade remains constrained in scope by North Korea’s difficulties with implementing needed reform. Given the lack of necessary tariff data, a score of zero is assigned.

Fiscal Freedom – 0.0%
No data on income or corporate tax rates are available. Given the absence of published official macroeconomic data, such figures as are available with respect to North Korea’s government expenditures are highly suspect and outdated.

Freedom from Government – 0.0%
The government owns all property and sets production levels for most products, and state-owned industries account for nearly all GDP. The state directs all significant economic activity. The government implemented limited economic reforms, such as changes in foreign investment codes and restructuring in industry and management, in 2002.

Monetary Freedom – 0.0%
In July 2002, North Korea introduced price and wage reforms that consisted of reducing government subsidies and telling producers to charge prices that more closely reflect costs. However, without matching supply-side measures to boost output, the result of these measures has been rampant inflation for many staple goods. With the ongoing crisis in agriculture, the government has banned sales of grain at markets and returned to a rationing system. Given the lack of necessary inflation data, a score of zero is assigned.

Investment Freedom – 10.0%
North Korea does not welcome foreign investment. One attempt to open the economy to foreigners was its first special economic zone, located at Rajin-Sonbong in the northeast. However, Rajin-Sonbong is remote and still lacks basic infrastructure. Wage rates in the special zone are unrealistically high, as the state controls the labor supply and insists on taking its share. More recent special zones at Mt. Kumgang and Kaesong are more enticing. Aside from these few economic zones where investment is approved on a case-by-case basis, foreign investment is prohibited.

Financial Freedom – 0.0%
North Korea is a Communist command economy and lacks a private financial sector. The central bank also serves as a commercial bank with a network of local branches. The government provides most funding for industries and takes a percentage from enterprises. There is an increasing preference for foreign currency. Foreign aid agencies have set up microcredit schemes to lend to farmers and small businesses. A rumored overhaul of the financial system to permit firms to borrow from banks has not materialized. Because of debts dating back to the 1970s, most foreign banks will not consider entering North Korea. A South Korean bank has opened a branch in the Kaesong zone. The state holds a monopoly on insurance, and there are no equity markets.

Property Rights – 10.0%
Property rights are not guaranteed in North Korea. Almost all property belongs to the state, and the judiciary is not independent.

Freedom from Corruption – 10.0%
North Korea’s informal market is immense, especially in agricultural goods, as a result of famines and oppressive government policies. There is also an active informal market in currency and in trade with China.

Labor Freedom – 0.0%
The government controls and determines all wages. Since the 2002 economic reforms, factory managers have had more autonomy to set wages and offer incentives, but the labor market still operates under highly restrictive employment regulations that seriously hinder employment and productivity growth.

Yonhap
1/16/2007

An international energy consortium has asked impoverished North Korea for nearly US$1.9 billion in compensation for its defunct project to build two nuclear power plants in the North under the 1994 nuclear agreement on the North’s freezing of its nuclear activities, diplomatic sources here said Tuesday.

North Korea, however, has yet to respond to the claim, the sources said, speaking on condition of anonymity. Analysts also said the North is unlikely to respond favorably, given its past record and current claims.

The North claims the 1994 agreement, known as the Agreed Framework, was breached by the United States long before it withdrew from the nuclear Non-Proliferation Treaty in early 2003, and is demanding compensation for the unfinished reactors.

“Now that the construction of the light-water reactors came to a final stop, the DPRK is compelled to blame the U.S. for having overturned the Agreed Framework and demand it compensate (the North) for the political and economic losses it has caused to the former,” an unidentified spokesman for the North’s Foreign Ministry said in a statement carried by the country’s Korean Central News Agency Nov. 28, 2005. DPRK is short for the Democratic People’s Republic of Korea, the North’s official name.

The diplomatic sources said the Korean Peninsula Energy Development Organization (KEDO) has asked for the amount in at least three letters sent to Pyongyang.

“(KEDO) has sent a letter (to North Korea) following every meeting of its executive board of directors since (last) May, demanding compensation for its assets at the construction site” in North Korea, one of the sources said.

“Letters were sent on five occasions, but the organization stated the specific amount in the three sent after September,” the source added.

The $4.6-billion project was officially scrapped early last year after years of suspension following the outbreak of an ongoing dispute over North Korea’s nuclear weapons program in late 2002. The communist state conducted its first nuclear weapons test on Oct. 9, 2006.

The sources said the amount includes expenses for KEDO’s executive office in New York.

A total of $1.56 billion had been spent on the nuclear reactor project before its official termination, of which, some $1.14 billion was shouldered by South Korea and $410 million by Japan. The European Union also pitched in $18 million for the joint project, which also includes the United States.

The countries blame the North for scrapping the project, which was part of a 1994 agreement between Washington and Pyongyang to settle a dispute over North Korea’s nuclear weapons program.

North Korea has attended international negotiations aimed at bringing a peaceful end to the dispute over its nuclear weapons program since its eruption in 2002, but no progress has been made since a 2005 round, during which the communist nation agreed in general to give up its nuclear ambitions in return for economic and diplomatic benefits.

Christian Science Monitor
Robert Marquand
1/3/2007

North Koreans are taught to worship Kim Jong Il as a god. In a manner unique among nations, the North exerts extraordinary control through deification – a cult ideology of complete subservience – that goes beyond the “Stalinist” label often used to describe the newly nuclear North.

While outsiders can see film clips of huge festivals honoring Mr. Kim, the extraordinary degree of cult worship is not well known, nor that programs promoting the ideology of Kim are growing, according to refugees, diplomats, and others who have visited the Hermit Kingdom.

In fact, in a time of famine and poverty, government spending on Kim-family deification – now nearly 40 percent of the visible budget – is the only category in the North’s budget to increase, according to a new white paper by the Korea Institute for International Economic Policy in Seoul. It is rising even as defense, welfare, and bureaucracy spending have decreased. The increase pays for ideology schools, some 30,000 Kim monuments, gymnastic festivals, films and books, billboards and murals, 40,000 “research institutes,” historical sites, rock carvings, circus theaters, training programs, and other worship events.

In 1990, ideology was 19 percent of North Korea’s budget; by 2004 it doubled to at least 38.5 percent of state spending, according to the white paper. This extra financing may come from recent budget offsets caused by the shutting down of older state funding categories, says Alexander Mansourov of the Asia Pacific Center for Security Studies in Honolulu.

It has long been axiomatic that the main danger to the Kim regime is internal unrest. That is, Koreans will discover the freedoms, glitter, and diversity of the modern outside world, and stop believing the story of idolatry they are awash in. “It isn’t quite realized [in the West] how much a threat the penetration of ideas means. They [Kim’s regime] see it as a social problem that could bring down the state,” says Brian Myers, a North Korean expert at Dongseo University in Busan, South Korea.

Since the poverty and famine of the late 1990s, everything from CDs and videos, South Korean radio, and cellphone signals from China, new styles and products, and new commercial habits have seeped in, mostly across the Chinese border, in a way that might be called “soft globalization.” Such flows feed a new underground system of private business, information, bribery, and trade that exists outside the strict party-state discipline and rules.

Yet rather than accept such penetration as an inexorable threat, Kim is putting up a serious fight to slow and counter it – by increasing his program of cult-worship.

Kim Worship 2.0

Like a computer software firm updating program versions, the North is steadily updating its ideology to make it relevant. This practice of mass control by in-your-face ideology has been laughed off in much of the world, including China. But North Korea is increasing its ideological cult worship. The scope of the current project outdoes even the cult of personality during Mao’s Cultural Revolution, according to a 2005 doctoral dissertation by Lee Jong Heon at Chung-Ang University in Seoul. Mr. Lee visited North Korea several times for his research.

After the Oct. 9 nuclear test, for example, banners sprang up over North Korea stating “We are a country with a nuclear deterrent.” Kim’s test feeds a national pride that is part of the propaganda drilled into Koreans from birth: that Kim alone can fend off the US and Japanese enemies. A US diplomat in Asia says such pride may prohibit Kim from giving up his nuclear program in the current “six party talks” – and those talks stalled again in late December in Beijing.

“The cult of personality campaign is more extensive today than in 1985,” says former South Korean foreign minister Han Sung Joo, who visited Pyongyang this past October, and in 1985. “Unlike the Stalin and Mao personality cults, there is a deification and a religious emotional element in the North. The twinned photos of Kim Il Sung and Kim Jong Il are everywhere. Every speech says Kim Il Sung is still alive. I think if I stayed another two weeks, I might even see Kim Il Sung. The country worships someone who is deceased, as if he is alive.”

Kim Jong Il has upgraded his deification strategies to strengthen the family cult system. Western reports often detail Korea’s unique “juche ideology” – a theology of Kim worship, repeated hourly and daily, reminding Koreans they are insolubly bound to the Kim family and must erase foreign influence from their minds.

Yet juche is a subcategory of a far more encompassing umbrella of deification known as woo sang hwa, or idol worship. In North Korea, woo sang hwa contains all the aspects of cult worship. Kim broke away from orthodox communism, for example, in a program called “our style socialism.” While Marxism-Leninism demands fealty to “nation,” “party,” and “serving the people” – Kim’s “our style [Korean] socialism” does no such thing. It makes “family loyalty,” with Kim at the head, the supreme good – a major deflection from communism.

During the late 1990s famine, a “Red Banner” campaign for unconditional loyalty and harder toil began. Then came “Kangsong Taeguk” in the late 1990s – a project to push economic and military ideology. This project culminated in the 1998 Taepodong-1 rocket launches, which thrilled North Koreans, frightened Japan, and started a whole new military mindset in Tokyo.

The North uses “ideology rather than physical control,” Lee says, whenever possible. The current variation of the program is called “military first.” It is intended to bolster North Korea’s nuclear efforts. Military First started as a campaign to support juche, and as a slogan designed to remind Koreans that the nation is at war. It came packaged with a rallying cry called “dare to die,” say refugees and Kim experts. (There’s a dare-to-die pop song, and a dare-to-die movie. Recent internal memos brought by defectors indicate “dare to die” is urged on local officials due to a feeling in Pyongyang that young people aren’t showing enough zeal to make such a dare.)

A new military focus

Yet Military First may now be a tool for evolving a significant structural change – a new ruling elite in day-to-day affairs. For years, the North Korean state was ruled by the workers’ party. Under Kim Il Sung the party was the driving force in Korea – the main route to achievement and pay. Everyone wanted to join. (Party members in China and Vietnam are 5 percent of the population; a 1998 Korean Central report put Korea’s membership at 5 million, or 22 percent, though it may be lower.)

“The outcome of the Military First policy replaces the workers as a main force,” says Haiksoon Paik, a North Korean specialist at the Sejong Institute outside Seoul. “North Korea’s party has not been functioning as well as it is supposed to … several positions in the Politburo have not been reappointed. Kim is not depending on the party, but a smaller more streamlined military apparatus. This is due to his politics as a result of the nuclear crisis brought by the Americans.”

“Military First is not aimed at building up the military, which is already quite built up and strong,” says Lee, whose dissertation is titled, “A Political Economic Analysis of the North Korean Regime.” “It is about replacing the old party – First Rice – structure of senior Kim. If the party is unwieldy, the military will control the people on behalf of the leader.”

Tellingly, on New Year’s Day, Kim Jong Il visited the shrine where his father was interred. He has gone there only four times since he came to power in 1995. Each visit has taken place in a year following major accomplishments. According to South Korean media, for the first time, Kim visited the shrine without party or government officials. This time, only key military officials were in attendance. On Tuesday, North Korean papers heralded the visit, and the Oct. 9 nuclear tests as “an auspicious event in the national history.”

Kim-worship in the North is a vivid – and inescapable – spectacle to behold, say visitors. Thousands of giant “towers of eternality” to Kim scatter the landscape. Special “Kimjongilia” crimson begonias are tended in family gardens. Kim’s media calls him variously the “Guardian Deity of the Planet,” and “Lodestar of the 21st Century.” In 2002, Korean mass dances known as Arirang, featured 100,000 flag wavers (and was described in state media as the “greatest event of humankind.”) Many loyal Koreans bow twice daily to Kim pictures that sit alone on the most prominent wall of their homes.

Perhaps the most misunderstood aspect of the Korean cult project is its recent veering toward race and ethnic solidarity, say Kim watchers. His main appeal to his people today, a push that rarely gets attention outside the North, is to the racial superiority of a people whose isolation and stubborn xenophobia supposedly makes their bloodlines purer. Mr. Myers notes that festivals of 100,000 flag wavers is not a Stalinist exercise, but a celebration of “ethnic homogeneity.” Since the 1990s Kim has more fervently claimed lineage to the first ancient rulers of Korea, a move intended to place him in a position of historical, if not divine, destiny as leader of the peninsula.

Korea Herald
12/27/2006

North Korea, desperate for foreign currency under U.S.-imposed sanctions, has started to sell its gold reserves on international markets, a Japanese newspaper said Tuesday.

The United States last year blacklisted a Pyongyang-linked bank in Macau, infuriating the communist regime which walked out of disarmament talks for 13 months during which it tested an atom bomb.

Since the US crackdown on the bank, North Korea has earned 28 million dollars in foreign cash by exporting gold to Thailand, which had not imported gold from Pyongyang for the previous five years, the Yomiuri Shimbun said.

North Korea exported 500 kilograms of bullion to Thailand in April and another 800 kilograms a month later, the conservative Japanese daily said without identifying its sources.

North Korea’s central bank, Choson Central Bank was also re-listed on May 12 for trading on the London Bullion Market, said the newspaper, quoting a spokesman for the London market.

The North Korean central bank, which can issue currency, joined the London gold market in 1976 but was de-listed in June 2004 due to inactive trading, the newspaper said.

The Yomiuri, citing South Korean data, said North Korea was estimated to have between 1,000 and 2,000 tons of gold reserves.

The United States blacklisted Macau’s Banco Delta Asia in September 2005, saying it suspected that 24 million dollars in North Korean accounts were linked to counterfeiting or money-laundering.

The accounts have been frozen and other Asian banks have taken similar moves.

The financial sanctions were a main topic during six-nation talks, aimed at persuading North Korea to end its nuclear program, which ended in deadlock last week in Beijing.

Joong Ang Daily
12/21/2006
Choi Hyung-kyu, Kwon Hyuk-joo

Half of the $24 million in North Korean assets held in the frozen Banco Delta Asia accounts came from the Hyundai Group of South Korea, sources here told the JoongAng Ilbo yesterday. Other sources said North Korea will be able to access some of the frozen holdings next week, because the money had been proven “legitimate.”

The Macao-based bank froze the North Korean holdings last year after the U.S. government accused Pyongyang of financial crimes, such as money laundering and counterfeiting U.S. dollars. Since then, the North has made the unfreezing of those assets a precondition for the nuclear disarmament negotiations.

A U.S. source who requested anonymity said yesterday the $12 million was a part of Hyundai Group’s payments to North Korea for inter-Korean businesses. The money was wired in several payments, the source said. The payments were initially sent to other bank accounts that deal with North Korea, the source said, and then forwarded to the Banco Delta Asia accounts from there.

To deposit a large sum, an account holder must inform the bank in Macao about the source of the money and its purpose. The source showed North Korean account holders’ statements which claimed the deposits came from Hyundai.

Another source well informed about Banco Delta Asia affairs also said the money came from Hyundai.

“It is not easy to distinguish how much of the North Korean assets was earned from legitimate economic activities,” a senior South Korean government official said. “To sort the matter out, the United States and North Korea should meet and discuss the issue.”

In Beijing, O Kwang-chol, the president of the Foreign Trade Bank of Korea, has been meeting with U.S. Deputy Assistant Treasury Secretary Daniel Glaser since Tuesday.

Signs also pointed to a thawing of the freeze on the accounts in the near future. Other sources said Pyongyang has dispatched officials to the city of Zhuhai in China with papers necessary to withdraw the $12 million from the bank in Macao. They said access will likely be granted Tuesday or Wednesday of next week.

Hyundai Asan, Hyundai Group’s North Korea business arm, said yesterday it has not sent any money to a Banco Delta Asia account. The Mount Kumgang tour program began in 1998.

The company said it has wired $1 million a month to an overseas bank account designated by North Korea.

A senior official with Hyundai Asan said North Korea frequently changed the account. “I don’t know if our payment was later wired to BDA accounts or not, but I think that could be possible,” he said.

Hyundai Group provided $500 million to North Korea on the eve of the 2000 inter-Korean summit by wiring the money to a North Korean account with a foreign bank, but the sum currently frozen at the Banco Delta Asia accounts is not connected to that, the sources said.

Daily NK
Yang Jung A
12/20/2006

Difficult to Recover British Funds Caught in BDA North Korea Accounts

In amongst the North Korean accounts that were frozen from Macao’s Banco Delta Bank (BDA) was joint funds from a British tobacco company which has been deemed difficult to recover.

The U.K. Financial Times reported on the 18th that the $7mn of the $24mn in North Korea funds frozen in BDA accounts is from Korean trusts and banks of which half the funds is estimated to from a joint account by British American Tobacco (BAT) and a tobacco company trading by North Korea.

BAT’s spokesperson Catherine Armstrong revealed in an interview with Radio Free Asia (RFA) on the 18th “The money has been certified as legal so we’re very keen to get the money out of the frozen account.”

Regarding the amount of frozen funds, Armstrong said “As there are no substantial data, an actual figure cannot be revealed but I am aware it is nearing tens and hundreds of thousands of dollars.”

Raphael Perl, a specialist at the U.S. Congressional Research Service (CRS) said “We don’t necessarily know on its face that the North Korean tobacco company is not also involved in criminal activity” and revealed “As North Korea sells fake cigarettes on a large scale, every tobacco company in North Korea is being suspected of conspiring illegal acts.”

Perl said “Even in the case a company is internationally based, a company is not completely owned internationally but if a joint ownership, it is even more difficult to discern whether or not the transaction was legitimate.”

In another sense, as reports suggest that “The U.S. Administration told North Korea $12mn of the $24mn frozen funds appears to be unrelated to North Korea’s illegal actions,” others are cautiously anticipating progress from the six party talks as North Korea’s legitimate funds are released.

The Fox News and the Korea Times (both stories below) are reporting that a growing number of insurers and reinsurers are growing suspicious of claims made by the North Korean government.  The story of North Korean insurance claims first emerged in September 2006 when the US started closing down DPRK bank accounts across Asia.  Insurers in these cases, though, were allowed to travel to the DPRK to examine the damage, even to sensitive areas. 

The stories below…

Fox News
North Korea Suspected of Collecting Millions in Reinsurance Fraud
Monday , December 04, 2006
By George Russell

[edited] A growing number of major underwriters around the world strongly suspect that communist dictator Kim Jong-Il’s regime is running an elaborate major insurance and reinsurance scam on them, to the tune of tens of millions of dollars or more.

The alleged fraud involves a wide variety of North Korean industrial and personal calamities where insurers have been presented with perfect government-controlled documentation of accidents, including deaths, along with carefully gathered photographic evidence, all compiled in a startlingly brief time.

That paperwork is coupled with a resistance to letting foreign insurance adjusters examine some of the most crucial physical evidence, except after long delays and under a watchful eye, if at all.

The growing concern in the reinsurance industry is that the property damage being claimed is vastly overstated, and the circumstances of some alleged accidents may have been altered, or that deaths for which insurance payment is claimed may have had nothing to do with the accidents.

The number of apparently ordinary people in the dictatorship who have suddenly been found to have foreign-backed life insurance is raising insurers’ eyebrows.  The chief concern is that only the Kim Jong-Il regime controls the information required to trigger the payments.

According to Michael Payton, a lawyer who represents several of the major insurers, the full extent of the reinsurance claims may involve more than $150 million. U.K. insurers facing these claims have only just begun to talk to each other about the potential scale of their North Korean losses.

North Korean insurance risk is also handled in a wide variety of other Western European markets, and as far away as Russia, India and Indonesia.

So far, there is little attempt to begin discussing the fraud possibilities across those national boundaries.

“I’ve never seen anything like it before,” said Payton, senior partner in the London-based international law firm of Clyde & Co., which specializes in insurance law. “The apparent involvement of the state in every detail of these claims, coupled with the impossibility of obtaining the usual corroborative facts independent of the state, makes these claims unique, in my experience.”

The suspected scam involves the huge international market for reinsurance, in which insurers reduce their risk on every kind of accident, from environmental catastrophes and crop failure to airline and auto crashes, by reselling much of their policy exposure to other syndicates of insurers outside their own countries. Huge sums are routinely covered in reinsurance; globally, the reinsurance market last year was valued at some $1.5 trillion.

One of the world’s most important reinsurance markets is Lloyd’s of London, some of whose syndicates are represented by Clyde & Co. But a number of major players in the global reinsurance market have exposure to North Korean claims.

The reinsurance industry has been badly staggered in recent years by huge claims from storms like Hurricane Katrina and terrorist disasters like the Sept. 11 attacks. In such a huge pool of often-complicated risk deals, North Korean reinsurance claims still represent only a drop in the bucket.

Nonetheless, it is a deeply troubling drop, because even though statistics are difficult if not impossible to come by, reinsurance industry sources believe there has been a recent sharp increase in claims coming out of North Korea.

The central focus of concern is the absolute control of ownership and information in North Korea by Kim Jong-Il and his regime. All North Korean insurance is controlled by one state-owned firm, the Korea National Insurance Corporation (KNIC), formerly known as the Korea Foreign Insurance Company, which in turn purchases reinsurance coverage abroad for risks that it has assumed in its domestic market.

Normally, most domestic insurers will use one, or at most two firms of brokers to obtain reinsurance. KNIC may use many, according to industry sources, and the brokers may well have no idea what business their colleagues are doing, or in what reinsurance markets.

“The North Koreans are extremely clever at spotting the gaps in the market,” an industry source says. “There is no transparency.”

Suspicions in London began to gel in July 2005, when North Korea reported that a medical rescue helicopter had crashed into a government-owned warehouse that authorities said was crammed with disaster relief supplies.

The entire contents of the warehouse, which ran to hundreds of thousands of items, were destroyed, KNIC said, submitting within 10 days a list compiled by the relief center of every single commodity that it said had been lost.

Along with the lengthy list came a reinsurance claim for more than 40 million euros, or almost $50 million at then-current rates, for 95 percent of the damages. The reinsurance was placed through London, but the risk was spread among reinsurers worldwide.

“They provided details including tens of thousands of children’s gloves, handkerchiefs, leather gloves, toilet soap and washing soap, within 10 days,” Payton said. “In the chaos which follows an accident of this kind, that is unheard of.

“A similar loss report in Britain might take months to compile.”

The North Koreans also supplied photos of the devastation, which insurers turned over to leading experts at photographic estimates of fire damage. The experts concluded that the volume of debris remaining within the warehouse, as assessed from the photographs, did not support the high volumes of relief supplies that were claimed to be there before the fire.

“The North Korean claims are supported by meticulous paperwork, something at which the North Koreans excel,” Payton said.

“For example, where death certificates and hospital reports are required, the regime’s attitude is ‘tell us what you want, we’ll give it to you.'”

In the case of a ferry accident that allegedly took place last April, near the coastal city of Wonsan, North Korean authorities declared that 129 people had died aboard the vessel after it struck a rock about 1,000 yards off the Korean coast, and only about 100 yards from an island. All of them, the Koreans claim, had been automatically covered with life insurance when they bought their ferry ticket, and that insurance risk had been passed on to the London market through a common reinsurance product known as “excess loss personal accident reinsurance.” Here the claims from reinsurers totaled about 5 million euros, or roughly $6 million.

The North Koreans claimed that most of the victims had died of hypothermia in the freezing water. Industry sources say that when insurance investigators discovered that weather conditions were warmer than claimed at that time, the North Koreans responded that severe winds were blowing from Siberia in the spring, making the water unusually frigid.

When insurers asked for permission to send an independent diver to inspect the ferry wreck, they were refused.

To get North Korea’s side of the story, FOX News approached the regime’s official insurance representative in London, Song Ryon Ko, at his home. Song refused to discuss the issue and hastily closed his door.

Britain’s Foreign Office says the lack of firm proof of fraud is why it hasn’t taken action on the reinsurance issue, although British diplomats say they are aware of it. But as the British government is trying to put limits on Kim Jong-Il’s nuclear weapons program, the lack of an official British reaction could also be an attempt not to rock the boat, as well as to protect its diplomatic presence in Pyongyang.

Other experts on North Korea who are unaffiliated with the British or U.S. governments are much more willing to take the reinsurance industry’s concerns at face value.

“Anything that might be called white-collar financial crime might be an easy target for the regime,” said Alexander Neill, head of the Asia-Pacific security program at the Royal United Services Institute for Defence and Security Studies in London.

“If you look at the Kim family regime or the North Korean regime much more as a criminal organization, but on a state level, I think that’s a better way to look at it. There’s a whole dark underworld of operations which can be undertaken with criminals who are apolitical.”

David Asher, a former senior adviser on East Asian affairs at the U.S. State Department, and coordinator of the Bush administration’s North Korea Working Group, agrees.

While unfamiliar with the current fraud allegations, Asher said he is aware of previous North Korean forgery of insurance policies for its shipping, including fake Lloyd’s of London coverage. “The country will do anything to raise funds,” he said. “They’re not a nation-state, they’re a criminal state.”

Kim Jong-Il’s regime depends on hard currency to maintain its privileged lifestyle and its internal solidarity. Criminal activity is “deep rooted, at every level of government,” Asher said.

Korea Times
12/5/2006
By Jung Sung-ki

The Kim Jong-il regime is suspected of collecting huge amounts of dollars through an international reinsurance fraud, believed to be a new illicit source of hard foreign currency for the impoverished state, a U.S. broadcaster reported Tuesday.

Fox News said a growing number of major underwriters around the world strongly suspect that the regime is running an elaborate major insurance and reinsurance scam on them, to the tune of tens of millions of dollars or more.

The report said the alleged fraud involves a wide variety of North Korean industrial and personal accidents where insurers have been presented with perfect government-compiled documentation of events, including deaths, along with carefully gathered photographic evidence all in a startlingly brief time.

That paperwork is coupled with a resistance to letting foreign insurance adjusters examine some of the most crucial physical evidence, except after long delays and under the state’s watchful eye, if at all, it said.

The report said growing concern in the reinsurance industry is that the property damage being claimed is vastly overstated, and the circumstances of some alleged accidents may have been altered, or that deaths for which insurance payment is claimed may have had nothing to do with the accidents.

The chief concern is that only the Stalinist regime, well-known to be brutal, unscrupulous and desperately short of foreign currency, controls the information required for the payments, it said.

“I’ve never seen anything like it before,” Michael Payton, a lawyer who represents several of the major insurers in the United Kingdom, was quoted as saying by the report. “The apparent involvement of the state in every detail of these claims, coupled with the impossibility of obtaining the usual corroborative facts independent of the state, makes these claims unique, in my experience.”

Payton estimated that the full extent of the reinsurance claims may be up to $150 million, and U.K. insurers facing these claims have only begun to talk to each other about the potential scale of their North Korean losses.

The cash-strapped regime has a worldwide reputation for its criminal dealings in weapons sales, drugs and near-perfect counterfeit U.S. $100 bills.